West Texas Intermediate (WTI) oil and Brent North Sea (Brent) oil are based on the same underlying commodity: a black liquid that can be heated, or refined, to make many products that we burn for energy. The difference between WTI crude oil prices – which is the cost of U.S. oil – and Brent crude oil prices – the cost of oil produced outside the U.S. – was supposed to disappear after the U.S. began allowing oil exports in 2016. The difference, or spread, between the two crude oil prices was just 20 cents in January 2016.
But the collapse of Venezuelan production, sanctions against Iran, and the trade conflict with China have increased the gap between the crude oil prices, putting a crimp in global growth.
A U.S. Glut and a Global Shortage
American and Canadian oil producers are suffering from a glut, or a surge in production. Caused by rising production in the Permian Basin of Texas, the glut overwhelmed the capacity of pipelines. The bottlenecks have caused oil produced in the Canadian province of Alberta’s tar sands to sell for as little as $35 per barrel.
Brent crude oil prices, however, are rising, as Venezuela goes offline, and economists worry that Brent crude oil prices are reaching the point at which they will hurt consumers. When oil is priced in euros or Japanese yen, rather than U.S. dollars, the recent increases in Brent crude oil prices are even steeper, given the weakness of those currencies.
China has officially removed U.S. oil from its tariff list, but Chinese refiners are avoiding U.S. oil because they fear that tariffs are coming. Shipments of U.S. oil to China fell from 9.7 million barrels in August to just 600,000 in September. The “oil weapon” may now be in the hands of China, which is increasing its imports from West Africa.
Developing Countries Are Hurt
As in earlier crises over oil, it is developing economies that are being hit the hardest, caught in the crossfire between the major powers.
India is now seeking loans to offset its rising oil costs, and a key Indian ETF, the iShares MSCI India ETF (NYSEARCA:INDA), has fallen 10% in the last month.
Among the big beneficiaries so far of the increase in Brent crude oil prices is Exxon Mobil (NYSE:XOM). XOM stock has risen from a March low of under $73 per share to its price this morning of almost $86. Exxon trades oil on the global market and controls refineries and pipelines that benefit from the U.S. glut. After delivering $239 billion of revenue last year, it reported a top line total of $138 billion for the first two quarters of 2018, and is expected to report revenue of $72 billion and earnings per share of $1.30 when it announces its third quarter results. Those earnings are expected to be unveiled on Oct. 26.
Chevron (NYSE:CVX) also appears to be benefiting from the divergence of crude oil prices. CVX stock, which had been down 7.6% for the year as recently as September 10, has also gained over $10 per share in less than a month. CVX generated $76 billion of revenue in the first six months of the year and is expected to report a top line total of $43 billion for Q3, against $127 billion of revenue for all of 2017. CVX is also expected to announce its Q3 results on Oct. 26.
The Bottom Line on Crude Oil Prices
The divergence between crude oil prices helps middlemen and hurts many producers.
Right now, the U.S. seems to be sitting pretty, with ample supplies of oil and crude oil prices that are much less than the global average, benefiting U.S. consumers and manufacturers.
But the crude oil price divergence is also hurting global growth and causing other countries to become upset with the U.S. Their reaction, when it comes, may not benefit your portfolio.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
